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Software leads sector declines

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Today's 27% decline in shares of PeopleSoft (NASDAQ:PSFT) $27.22 -27% seems a little severe for a company warning that earnings were going to come in a penny shy of estimates, but it has set the software sector on its ear as fears build that there may be other such drubbings to take place should a software vendor warn on earnings.

This action has the GSTI Software Index (GSO.X) 157 -5.42% leading today's sector losers and bearish traders are active in the group.

GSTI Software Index Chart - Daily Interval

Bears are going to be battling some near-term support in the GSO.X at current levels, but a trade much below the mid-point of our regression channel and further violation of upward trend most likely has the GSO.X vulnerable to the 80.9% retracement level of $140. One can envision "smart money" having shorted the $180 level and most likely targeting the 140 area or at least the February lows near 150.

Check Point Software Chart - Daily Interval

I've set up my chart for Check Point Software (NASDAQ:CHKP) to honor what we've taught in the use of retracement and regression. We see some striking similarities between CHKP and the GSTI Software Index (GSO.X). Now a trader can follow both the sector and the stock of CHKP and start looking for any DIVERGENCE. Should one or the other start to trade much different than the other, a trader would be on the alert and ready to take some action. For those traders that took this play as a short last week near the $31.27 level, I'd be moving a stop down to break- even at a minimum, or snugging a stop just above yesterday's high to help assure a profitable trade. A quick move to the $26 level would be our original target. While $4 doesn't seem like a "huge move" it would represent a 13% decline, and that's not too bad in a market that has been rather range-bound in recent months.

Jeff Bailey
Senior Market Technician
Option Investor

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